The practice of granting subsidies has a long history dating back to medieval times, and its mechanisms haven't changed very much, since then. On the contrary, the types of subsidies - anything from farms to production have grown in number since then.
Subsidies' backstory is neither savoury nor noble; indeed, past subsidy initiatives - Statute of Frauds (1667) in the UK and 'Forty acres and a mule' in the US incensed the masses at the time they were enacted.
Considering today's simmering anger and contempt toward such government grants, well-matched by past rebellions over the same thing, you'd think that political bodies the world over would consider alternatives to such programmes post-haste,
They probably are. The trouble is, pulling support out from under industries, social programmes and people who depend on those grants is a complex undertaking, only in part because subsidies provide more substantial benefits to society than add to its detriment.
| Subsidy Pros: | Subsidy Cons: |
|---|---|
| 1. enable levelling the economic playing field. | 1. May create economic disparity. |
| 2. help reduce negative externality. | 2. may encourage inefficiency. |
| 3. allow for lower pricing of goods and services. | 3. may cause higher taxation. |
| 4. provide a greater diversity and supply of goods | 4. difficult to measure their benefit or success. |
| 5. help to prevent industrial decline. | 5. may encourage waste and over-production. |
Nobody could ever say that today's subsidy programmes don't deserve at least some of the outrage heaped upon them but maybe we're being too hasty in condemning them. What we really need to do is understand why they provoke such anger and how subsidies' negative aspects can be mitigated.
What Can Be Subsidized
As touched on in this article's introduction, sorting out subsidies is a complex affair - especially when you consider the breadth of enterprises and conditions that receive subsidies today:
- transportation
- healthcare
- food production, to include agriculture, fisheries and meat processing/packing
- industry, to include petroleum, finance, automobile and clothing
- imports and exports
- housing
- employment
This abbreviated list doesn't even touch on education, scientific research or any of a number of ventures, public and private, that receive government funds.
As you look over this list, the thought "Why is industry subsidized when it operates on a capitalist economic model?" might cross your mind, and rightly so. A part of the answer lies in the UK's new subsidy system, implemented just last year.
Businesses are in business to make money. If they can't generate sufficient profits to remain viable, they can move somewhere else. For instance, consider a London-based business whose costs - rent, labour, transportation, etc., have gotten too steep. They may relocate to another country where such costs would be lower.
The government would subsidize such a business because so many workers suddenly without pay, lost tax revenue and left-behind infrastructure would severely impact the city's economy, thus compelling that business to continue operating as they have been. That subsidy doesn't have to be a cash grant, it might be a lowering of their tax burden or an exemption from certain taxes.
Grants and taxes are just two examples of subsidies; there are many more.
The Trouble With Subsidies
Critics of subsidy schemes point out that these grants and allowances amount to the government handing money over with hardly a glance at how that money is being used or whether the subsidy is still justified. After all, if executives earn several million pounds annually and the shareholders are satisfied with their returns, how does such a profitable enterprise merit taxpayer money?
The principle driving subsidy allocation is 'Public money for public good.' The trouble is, the public doesn't necessarily see subsidizing such companies as a public good, mainly because they believe money is handed over with little to no oversight or control on how it's used.
That's not true in all cases.
For instance, farm subsidies are closely monitored and farmers must comply with government mandates to get more than the Basic Subsidy Payment (BSP). Furthermore, these landowners may take on extra initiatives, such as soil remediation and reforestation to receive additional subsidies.
Admittedly, the UK does better at auditing subsidy recipients than some other countries; still, the system, as it currently is, offers great potential for fraud.
One final downside of subsidies: unintended consequences, usually not fortuitous ones.
The government funds all of these programmes with tax revenues. Every time an entity applies for a new subsidy, the government must first justify it and then, find the money for it. The trouble is, governments aren't like businesses, they're not designed to turn a profit so they seldom have extra money laying around.
Raising taxes is the most common way to secure extra funds. Unfortunately, citizens' taxes usually make up the shortfall, either through property taxes or stamp duty, VAT hikes or other taxes.
A big part of the subsidies conundrum is that they go on and on, long after the need for subsidization is over. Fortunately in the UK, every time a new Parliament takes over the reins, they review the current subsidy status and...
Come time to cut the string on these perverse subsidies, as they're called, government officials face a barrage of protest, usually from the beneficiaries of those subsidies, that cutting their funding will result in dire economic consequences.
Which begs the question: how do subsidies affect the economy?
Maybe cutting subsidies out isn't the answer. But, perhaps, finding alternate ways to support and subsidize citizens and enterprises would be a viable solution.
Alternatives to Subsidies
Current subsidy systems around the world are simply not sustainable. Governments cannot continue to raise taxes, nor should they ignore bad actors - those who count on subsidies as part of their bottom line or overlook perverse subsidies.
Fortunately, thanks to dramatic conditions such as climate change and the coronavirus pandemic, there is now a greater effort to either secure funding from other sources or partner with the formerly subsidized to help them find ways to diversify their income streams.
Monetizing Assets
If you've ever seen a farm with a wind turbine or a solar array, an advert on public transportation or a city park hosting a concert festival, you've witnessed asset monetization.
The trick to using assets for income generation is knowing what is on hand and what can be spared without putting any of the core business' components at risk. Once that inventory is complete, conducting a risk analysis will determine which aspects would suffer the least impact from the conversion to a monetized asset.
From there, it's just a matter of determining a timeframe to transition away from subsidies.
Finding Collateral
Small and medium businesses (SMEs) produce a substantial portion of nations' gross domestic product (GDP). However, they often have trouble meeting the required criteria for loans at advantageous terms; subsidies are thus vital to their continued operation. But subsidies don't necessarily help such businesses grow.
These firms may have trouble securing financing because haven't been in business long enough, they don't have an established record of credit or they don't have enough assets to serve as collateral to guarantee against default.
Such enterprises may be better served short-term subsidies, maybe just five years' worth, that will allow them to acquire assets they could later use for collateral.
Such a subsidy plan would create an incentive for the business' targeted development rather than confine them to a system of limited financial aid.
Proof of Work Systems
One reason that subsidies are viewed as unsustainable is that there are comparatively few conditions attached to the monies received. And then, to add insult to injury, entities may continue to receive subsidies long after the need for financial support has passed.
Employment subsidies are a fine example of such.
Governments offer businesses subsidies to fund hiring schemes or otherwise provide job opportunities. However, at some point, a company will have all of the employees it needs and can pay for. And, yet, the subsidy continues.
In such cases, requiring periodic reporting that the purpose stated on the subsidy application is still legitimate and ongoing, and a listing of all the steps taken to resolve the conditions the subsidy was meant to abate.
This system has its drawbacks, not the least of which is the mountain of paperwork and the manhours to process it. However, it would curtail paying subsidies to companies that have already reached optimal operating and financial conditions.
For further studies find past papers economics A levels here on Superprof.
Non-Governmental Organisations
Over their 200+ years of history, NGOs have perpetually shifted their focus to the most pressing social and economic matters of the day. For most of that time, these organisations worked to remedy social crises; now, more of them also contribute to environmental causes.
The critical difference between NGO and government subsidies is their duration: often, NGOs' financial assistance is relatively short, usually meant to alleviate an immediate condition. However, some funds are disbursed over the long term; Oxfam is just one NGO that enjoys long-term partnerships.
Often, these organisations partner with governments and businesses to bring about more equitable economic solutions to today's most pressing problems. For instance, they might examine subsidy schemes that lead to an excess of production which, in turn, may lead to dumping - selling goods at an abnormally low price.
Each of these solutions provides an alternative to eternal government subsidy schemes. Furthermore, each incorporates an audit system to ensure the subsidy in question is still needed.
But, of course, to fully understand how they could work to curtail subsidies, you have to know what subsidies are - beyond 'free' government money.
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